DISCLAIMER: So I am by no means an attorney and nothing I say in this post should be construed as Legal or Financial advice, I am just a dumb ape whose head exploded a bit today in class. Other apes who are smarter than me please come into the comments to tell me your theories and discussions on this topic and vet it further. I am going to list some of the Legalese that may be difficult for the layman to understand after the theory and you can refer to and from it. I will do my best to make it in chronological order as it appears in the theory.
So after my class today my professor and I were chatting about cryptocurrencies and specifically their status as a fiat currency, one that is considered money just as the USD and Euro etc. Context on this, El Salvador recently made crypto a legal tender in the country after promising to do so back in June. https://www.bbc.com/news/business-58459098 . Even though the system crashed, by enacting crypto as a currency, they have potentially made crypto legal tender to be accepted in other countries around the world giving crypto more legitimacy to be among other physical currencies as mentioned above. This throws a huge monkey wrench into some secured transactions that major money management firms may have taken out against their crypto assets as they could be at risk of not being perfected anymore and their security agreements could be nullified especially if a bankruptcy were to occur. Needless to say, but this would also have huge implications to how much more can and will the money management firms be able to continue GME Fuckery.
The status of Cryptocurrencies used to be that of property as Crypto was not considered a fiat currency and thus was subject to the status of property. With this change, Crypto specifically, may no longer considered property and thus cannot be perfected in the same manner as something like a house or a car. This matters because when the bankruptcy trustee comes knocking, you want to make sure that your Security Interest in a property is perfected as any non-perfected Security Interest gets trumped by the trustee. Basically this concept means that if a company were to file for bankruptcy, all unsecured creditors get knocked off and only secured creditors remain to collect from the company. If you loaned as an example $100,000,000 USD to a company based on their $100,000,000 Crypto asset as collateral in a security agreement, and that collateral would not longer be valid due to its change in status, you would lose out on $100,000,000 USD that you loaned to said company.
So what this means is any big money management firm would not only be margin called to potentially have to repay a loan they took out against their crypto assets, but they would also lose the ability to use those assets in the future as collateral for loan or margin agreements. Here is how those big money management funds might have used this margin call to swing in their favor.
TIN FOIL HAT SECTION BEGIN!
Those money management firms may have used this as an opportunity to dissuade other governments from doing the same action as having even more variety of cryptocurrencies be recognized by government bodies could lead to a loss of even more assets to take out loans and margin against. They would do this by selling off most of their crypto assets to force the crypt market to dump thus showing it is not a stable currency to be used as a medium for transactions.
TIN FOIL HAT SECTION OVER!
The conclusion I have drawn from this is that Margin Calls may have went out on Tuesday in order for Secured Creditors to collect on some of the credit that they have given out to money management firms as their credit is no longer secured by an asset. This is what could have led to the crash on Tuesday. This has huge implications for GME as those same firms no longer can take out as much margin to short GME and they also had to forfeit a lot of the money they may have had on hand. This may very well be a factor in the coming days as with less money on hand and less assets to take loans out against, this firms have lost a huge chunk of their borrowing power in addition to the future of taking loans against crypt being up for question.
TL;DR: Crypto not considered property for Hedge Funds to borrow money against and they may have had to sell a bunch of it in order to meet margin calls due to fear of crypto no longer securing transactions. Less money for Hedge Funds, less margin for Hedge Funds, less money for continued Fuckery for GME
Fiat Currency – Money that is backed by a country’s government rather than using a physical commodity or a financial instrument.
Secured Transaction – An agreement between two parties in which a Debtor gives a Secured Creditor special rights/interests in an asset or property they own, such as security or property.
Secured Creditor – Any creditor/lender that is associated with an issuance of a credit/loan backed by. collateral.
Collateral – Some form of property pledged as a security to ensure repayment of a loan. §9-102(12)
Process of Perfection – Perfection of a Security Interest occurs when attachment is obtained and al other prerequisites are met. §9-308
Side Note: my professor referred to the stock market and the DTCC when we ended our discussion today as a House of Cards and all I can think of when he said that was “when will that House of Cards burn”
Reference: All the information I am getting for this theory comes from the Uniform Commercial Code for Secured Transactions, specifically section 9 dealing in Secured Transactions. Some case law is also shown in addition with the The Commodity Futures Trading Commission (CFTC) deeming crypto to be property and not a fiat currency. Other agencies and courts generate conflicting results, but this would most likely add legitimacy to crypto becoming a fiat currency and not property for purposes of secured transactions Link to the references used for all my research are below,
Any questions please feel free to put in the comments below and I will try to answer them as quickly as I can, I tried to be as thorough as possible in explaining this, however this does have a lot of legalese and I may have lost a few things in translation.